Introduction
You can think of staking as a less resource-intensive alternative to mining. It involves placing your funds in a cryptocurrency wallet to support the security and operation of a blockchain network. In simple terms, staking is the act of locking up cryptocurrency to earn rewards.
In most cases, you can stake your tokens directly from a cryptocurrency wallet such as Trust Wallet. On the other hand, many exchanges offer staking services to their users. Binance Staking allows you to earn rewards in a very simple way by simply placing your tokens on the exchange. We will explain this in more detail later.
To gain a deeper understanding of what staking is, you need to first understand how Proof of Stake (PoS) works. Proof of Stake is a consensus mechanism that allows blockchains to run in a more energy-efficient manner while maintaining a significant degree of decentralization (at least in theory). Let’s take a deeper look at what Proof of Stake is and how staking works.
What is Proof of Stake (PoS)?
If you know how Bitcoin works, you're probably familiar with Proof of Work (PoW). It's the mechanism by which transactions are collected into blocks. These blocks are then linked together to create the blockchain. Specifically, miners compete to solve a complex mathematical puzzle, and whoever solves it first gets the right to add the next block to the blockchain.
Proof of Work has proven to be a very powerful mechanism for facilitating consensus in a decentralized manner. The problem is that it involves a lot of arbitrary computation. Miners compete to solve puzzles for no other purpose than to secure the network. One could argue that this excessive computation is justifiable in itself. At this point, you might be wondering: is there another way to maintain decentralized consensus without the high computational cost?
Consider proof of stake. The main idea is that participants can lock up tokens (their "staked stake"), and at certain intervals the protocol randomly assigns one of them the right to validate the next block. Usually, the probability of being selected is proportional to the number of tokens: the more tokens locked up, the better the chance.
This way, the factor that determines which participants create blocks is not based on their ability to solve hash challenges as with proof-of-work, but rather on the number of staked tokens they hold.
Some might argue that producing blocks through staking can improve the scalability of a blockchain. This is one of the reasons why the Ethereum network is moving from proof-of-work to proof-of-stake in a set of technical upgrades collectively known as ETH 2.0.
Who created Proof of Stake?
One of the early proof-of-stake implementations was probably Peercoin, which was described by Sunny King and Scott Nadal in their 2012 paper. They described it as “a peer-to-peer cryptocurrency design derived from Satoshi Nakamoto’s Bitcoin.
The Peercoin network was launched with a hybrid PoW/PoS mechanism, where proof of work was used primarily to mint the initial supply of tokens. However, this mechanism is not necessary for the long-term sustainability of the network and is becoming less and less important. In fact, much of the network's security relies on proof of stake.
What is Delegated Proof of Stake (DPoS)?
An alternative version of this mechanism was developed by Daniel Larimer in 2014 and is called Delegated Proof of Stake (DPoS). This mechanism was initially used as part of the BitShares blockchain, but it wasn’t long before other networks adopted this model, including Steem and EOS, also created by Larimer.
DPoS allows users to stake their token balances in the form of votes, where voting power is proportional to the number of tokens held. These votes are then used to elect delegates who manage the blockchain on behalf of the voters, ensure security, and reach consensus. Typically, staking rewards are distributed to these elected delegates, who then distribute these rewards to voters in proportion to the individual contributions they have made.
The DPoS model allows for consensus to be achieved with a smaller number of validators. Therefore, this model tends to improve network performance. On the other hand, it can also lead to a lower degree of decentralization, as the network relies on a small set of specific validators. These validators handle the operation and overall governance of the blockchain. They participate in the process of reaching consensus and defining key governance parameters.
In short, DPoS allows users to demonstrate their influence over other participants in the network.
How does staking work?
As we discussed earlier, proof-of-work blockchains rely on mining to add new blocks to the blockchain. In contrast, proof-of-stake chains produce and validate new blocks through a staking process. Staking involves locking up certain validators’ tokens so that the protocol can randomly select them to create a block at specific time intervals. Generally, participants who stake a larger amount of tokens have a higher chance of being elected as the next block validator.
This allows blocks to be produced without relying on specialized mining hardware (such as ASICs). While ASIC mining requires a large investment in hardware, staking requires a direct investment in the cryptocurrency itself. So instead of competing for the next block through computational work, Proof of Stake validators are selected based on the amount of tokens they have staked. The "staked stake" (tokens held) is what incentivizes validators to maintain the security of the network. If they don't, their entire staked tokens could be at risk.
Each proof-of-stake blockchain has a specific staking currency, and some networks use a dual-token system where rewards are paid in a second token.
At a very practical level, staking simply means having funds in the right wallet. Basically, this allows anyone to perform various network functions in exchange for staking rewards. This also includes adding funds to the staking pool, which we will get to shortly.
How are staking rewards calculated?
It’s hard to explain this in a few words. Each blockchain network may use a different method to calculate staking rewards.
Some will be adjusted on a block-by-block basis, taking into account a number of different factors. This may include:
The number of tokens staked by the validator
How long the validator actively stakes
Total number of tokens staked on the network
Inflation rate
other factors
For some other networks, staking rewards are determined as a fixed percentage. These rewards are distributed to validators as some kind of compensation for inflation. Inflation encourages users to spend their tokens instead of holding them for the long term, which may increase their usage as a cryptocurrency. But validators can use this model to accurately calculate the staking rewards they can expect.
Providing a predictable reward schedule, rather than the probability of receiving a block reward, may seem beneficial to some people, but since this is public information, it may incentivize more participants to participate in staking.
What is a staking pool?
A staking pool is a group of token holders who pool their resources to improve their chances of validating blocks and getting rewards. They pool their staking power and share the rewards in proportion to their contribution to the pool.
Setting up and maintaining a staking pool often requires a significant investment of time and expertise. Staking pools are often most effective on networks with relatively high barriers to entry (technical or financial). As a result, many pool providers charge a fee from the staking rewards distributed to participants.
In addition, mining pools can also bring more flexibility to individual stakers. Typically, staked equity must be locked for a fixed period of time, and the protocol usually sets a time for withdrawal or unbonding. In addition, it is almost certain that a substantial minimum balance is required to disincentivize malicious behavior.
Most staking pools require a small minimum balance and do not add extra withdrawal time, so joining a staking pool rather than staking individually may be a good option for new users.
What is cold staking?
Cold staking is the process of staking on a wallet that is not connected to the internet. This can be done with a hardware wallet, but it can also be achieved using an air-gapped software wallet.
A network that supports cold staking allows users to stake while holding their funds securely offline. It is worth noting that if stakeholders take their tokens out of cold storage, they will stop receiving rewards.
Cold staking is particularly useful for large stakeholders who wish to ensure maximum protection of their own funds while supporting the network.
Want to start your cryptocurrency journey? Buy Bitcoin on Binance now!
How to Stake on Binance
In a way, when you deposit your tokens on Binance, you are adding them to a staking pool. However, there are no fees and you get all the other benefits of holding your tokens on Binance!
All you need to do is deposit your proof-of-stake tokens on Binance and all technical requirements will be taken care of. Staking rewards are usually distributed at the beginning of each month.
You can view previously allocated rewards for a given token under the “Historical Returns” tab on each project’s staking page.
Summarize
Proof of Stake and staking will open up more avenues for any user who wants to participate in blockchain consensus and governance. In addition, it is a very simple way to earn passive income by easily holding tokens. As staking becomes simpler, the barrier to entry into the blockchain ecosystem becomes lower and lower.
However, it’s important to keep in mind that staking is not without risk. Locking funds in smart contracts is prone to error, so always do your own research and use a high-quality wallet like Trust Wallet.
Be sure to check out our staking page to see which tokens support staking and start earning rewards today!
